Raya Hassan has been Lebanon’s Minister of Finance since the government was sworn in, in November 2009. Before becoming a minister, she worked in the office of the prime minister on both Paris II and Paris III donor conferences, and served as an advisor to the minister of economics and trade with the United Nations Development Program. As part of her ministerial duties she has been tasked with drafting a budget for a country that has been without one since 2005. On condition that figures relating to the budget would not be discussed, Hassan agreed to an exclusive interview with Executive to discuss issues related to the budget, the public debt and the finance ministry’s strategy going forward.
E The government’s debt strategy so far has been to trade short-term debt for long-term debt; this increases the debt service and moves the burden onto future generations, as well as exposing ourselves to currency fluctuations. Can you address these concerns?
When we are formulating our debt strategy we think of several factors. One is extending the maturity curve in order to smoothen [it]. Because we have maturities that go up and down, we try to smoothen it as much as possible so that we don’t have one big maturity of spending at a particular year and time; and we try to extend it as much as possible.
We extended for several reasons. While it’s true you pay more, you are getting a comfort zone. Plus, when we go abroad for Eurobond [subscription] we are able to get longer maturities for better prices than we can do here…there we issue at 10 and 15 [years]. We used to issue Eurobonds at 8, 9, 10 percent; now we have the luxury to refinance this debt at much lower coupons than we were able to five years ago. We want to make sure [the debt] is not only [held] purely by Lebanese banks, because this is too much exposure for them. It’s not a good thing for either of us.
E The decision to stop issuing treasury bills [TBs] was met by “anger and confusion,” to quote one banking executive, and has seemingly been overturned, since you will begin issuing again in April. This has sparked accusations that the finance ministry has caved under pressure from creditors. Can you respond to this claim and explain the strategy of halting and re-issuance of T-bills?
Frankly, I didn’t speak to any bank. It coincided with me on [a] Monday deciding on how much to take from the auction for the TBs. I told [my staff], ‘please get me how much is now in the treasury account.’ It turned out to be 6,500 [billion LL or $4.3 billion] on a net basis. I [then] said ‘I think we are going overboard with the surplus reserve that we want to have in terms of the treasury account. Therefore let’s maybe think about stopping the auction at least for a short period.’
I picked up the phone and called the [central bank] governor and decided, with him — meaning he did not say, ‘No don’t do it,’ he said, ‘Fine, if you exit from the market maybe I will try to go in myself with very short CDs [certificates of deposit] issuance and let’s do it.’ Before I sent the letter specifying exactly how long I was going to be out of the market, it just happened, probably from a procedural point of view, that he issued a statement which went out to Reuters that said: ‘The Ministry of Finance is going out of the market indefinitely.’ That was not the case. I said that we will make sure that we go out for a short period and I sent, subsequently, a letter that said we were going to go out for one month.
I could have stayed [in the market]. That was another option; but then I could not take anything at all. I had to weigh my options: either let the auction happen and not take anything, which would have signaled a bad thing, or say that we were not going to do an auction for one month, knowing that, if there was going to be any need by the market, the central bank could come in and [supply] it.
It’s good to have a reserve, obviously, and the approach I am adopting is to have in my treasury account, three months worth of future maturities, whether Eurobonds or T-bills. The 6,500 billion [Lebanese lira] was beyond that, so I said, ‘let’s not go overboard with this because this costs money as well.’
Having this buffer has its price but we would rather have the buffer, rather than not having it at all and finding ourselves in any kind of situation [where] we are not able to honor our debt obligations. But once it went over the threshold we had [set] for ourselves, we said let’s not increase it.
E You said previously you were going to decrease it to a figure of 4800 billion LL.
Something to that measure.
E Many economists say that, considering this surplus comes from debt, which keeps the level of total stock of public debt higher, this is not congruent with Ministry of Finance’s and the Prime Minister’s stated principle that “we don’t want to increase the debt.” How does it make economic sense to horde borrowed money to pay back interest on debt?
Look, it’s not additional debt. This is pre-funding; I am not borrowing. At the end of the year, I will not be borrowing more as a result of this approach. I’m just borrowing sooner. I’m rolling over sooner. I am borrowing so I can meet my dues. I was going to do it anyway. I am not increasing my debt, I am just rolling over an existing debt to refinance the existing debt, but I am doing it sooner than the maturity. So it’s not increasing debt.
I have to increase debt because I have a deficit. At the end of the year [I] will have to borrow more. As long as there is a deficit, the stock of debt will increase, but this particular measure is pre-funding. You need to use it anyway. You need to go out of the market and refinance but you do it three months in advance rather than doing it at the date of maturity, because you want to make sure that in this volatile environment, you don’t run out of cash to pay whatever maturity might come.
E Do you have a projection plan under the current public debt strategy to begin paying off the principal on the public debt any time soon?
Maybe [we can] if we switch some of the project financing support that we got under Paris III. We have around $800 million [pledged] from the French, from the Americans, from the World Bank; [but] these are all linked to conditions. Plus, if we go ahead with privatization, the proceeds will go toward reducing our debt stock.
We are also betting on growth, which should be the anchor of any debt reduction strategy. Growth raises additional revenues and hopefully goes toward reducing the primary surplus and eating out of our debt stock. It has to be a multi-faceted approach.
E One of the biggest costs we have is Électricité du Liban (EDL) fuel costs. Currently this is financed through letters of credit, but do you have a fuel cost hedging strategy to predict fuel costs?
No, frankly we have not done it. It could be something that needs to be explored but today you have structural problems that you need to address irrespective of hedging against an increase in fuel prices. We don’t even have cost recovery; we are not at this stage. Therefore, EDL itself needs to be corporatized according to the law. There should be, eventually, the unbundling of the sector.
You need to tackle the generation [which] is a problem by itself. And, you need to tackle the distribution end, plus you need to reduce all your technical and non-technical losses. There is a whole restructuring [process] that needs to be done on EDL. One of [the elements] is to at least achieve a full cost recovery of the electricity and therefore we need to review the tariff structure. The tariff structure now is low by any international standards. It does not cover primary costs, let alone losses.
When I see my budget, in terms of the primary expenditures, its one-third salaries, one-third servicing, and one-third EDL. So there is not much you can do if you don’t solve the debt problem and you don’t solve your electricity problem — you cannot release the additional funds that you need for the government to really spend on the areas that you need to spend on like health, security and education. The structure of our budget is so rigid that there is very little room for improvement at this point.
E Do you think that all the other ministers understand this rigidity when you have conversations in the cabinet sessions?
We are trying to explain to them if possible. Some people don’t have this macro [economic] view of the inter-linkages between the different elements of the budget. We are trying to make the case that we are not happy with any VAT [value added tax] increases. God willing, we will not reach VAT increases.
But the situation that we are in right now necessitates that any increase in expenditures will have to be matched by an increase in revenue. Otherwise, if that does not happen we will accumulate a primary deficit. If we accumulate a primary deficit, our debt will start increasing at an increasing rate and we are back to square zero; pre-Paris II.
It’s a no brainer. We are not fans of any additional taxes, but if we are going to have to really address the structural problems and we don’t want to go to concessional funding [soft loans] or the private sector, then the only way is to try to raise additional revenues.
E Many entities have been off-budget line items in the past, such as the capital spending for the Council for the South and the Displaced fund, and capital spending is still not included for other entities such as the Council for Development and Reconstruction (CDR). As such, some economists have stated that up to 20 percent of spending goes to these non-budget line items, which are outside of the budget and only annexed later. Are these items and those like them going to be included in the next budget since it is, after all, public spending?
Yes, you are going to see them, definitely. You are going to see the actual expenditures and at the same time you are going to see them within the budget. You cannot incorporate all of these extra budgetary [items] that we call “treasury expenses” within the budget structure because, for example, for the treasury advances you don’t know it in advance. You cannot predict it, so you put it as an allocation within the budget. But in the budget book we are going to list them. We are going to say, ‘these are the budget allocations and these are the treasury expenditures’ and its going to be very transparent. The intention is at no point in time to say we have expenses that we don’t want to show. On the contrary, I want to show the bigger picture of how much our expenditures are.
E Do you agree that these entities constitute around 20 percent of spending?
It might be even more.
E Why are items like The Regie [Libanaise de Tabacs et Tombacs] and Ogero’s lump sum payments not broken down to in the budget proposals of years past?
These are the annexed budgets and these are also within the budget. The Minister of Telecom for instance, says he wants a certain amount of investment, gives us his budget and says, ‘I will transfer whatever surplus I have. After I let out my expenditure and I collect whatever revenues, I will send you the surplus that I have in my budget.’ All the annexed budgets are like this [including] the national lottery. They are given a budget and any surplus is transferred.
E So there is no key performance indicator (KPI) based criteria you use with these entities to ascertain their budgets then?
No. But this is what we are trying to do through the performance-based budget, which has already started in the Ministry of Education. This should pave the way for eventually using KPIs and performance indicators to start assessing the efficiency and effectiveness of all of these expenditures. This is part of the reform processes.
E A lot of the money due to the government, in the form of our direct taxes from the National Social Security Fund, municipality tax and income tax, is being evaded and double book-keeping is rampant, causing much waste of government revenue. Since taxes make up the bulk of government revenue, what has been done to curb this problem and are there any tangible results?
We are not involved with the municipality tax or the NSSF. Income tax is another story as is the VAT. You also have property taxes and things of the sort. I have to admit that there is evasion, everybody knows that. The banks pay 40 percent of total income taxes, so it’s concentrated.
E And they only constitute around 20,000 workers?
No, here I am talking about corporate [income tax]. Small grocery shops, the self-employed, doctors’ offices and things of the sort [evade taxes]. But there has been a lot of improvement. If you study the trend of the revenues you can see — other than the growth factor — that collection has been improving every year.
Obviously, there is still a lot to be done. How to do it? We are now trying to implement a twinning arrangement called a risk compliance audit. Rather than the inspector wanting to study every file and every company — which throughout his entire life he will never be able to do — we are saying that we can set up certain risk criteria and based upon this, we will study this group of people every year. It will not be done to all [companies]. As a result, based on that criteria, [we will study] the most important portfolios that poses a risk of evasion.
E The Central Bank is, by definition, the “lender of last resort” and it now holds around 15 percent of the public debt. Usually this is explained by saying that the Banque du Liban (BDL) is practicing its monetary policy. Can you explain why this amount has become so substantial if this is the case, and why aren’t they taking measures to decrease the burden on the government?
They should. Eventually, the BDL holdings of TBs should go down. It’s true that it is part of the monetary tools that they use. But I think eventually they should reduce the exposure and the TB holdings of the government.
